A lower tax expense can lift net income without reducing cash tax payments. Expense, balance-sheet tax accounts and cash paid answer different questions. This is a company-filing reconciliation, not a tax-return calculation.
Official references checked: . The figures below are independently constructed fictional cases, not results of the linked companies.
1. Use a consistent earnings scope
Check that pretax profit and tax expense cover the same period, consolidated scope and continuing operations. Fictional pretax profit of 100 and tax expense of 24 produce an effective rate of 24 / 100 = 24%. A difference from an assumed reference rate of 25% does not by itself indicate an error. The public NZ IAS 12 text, paragraphs 79–86, an IFRS-equivalent standard, provides a reference for expense components and rate reconciliation.
2. Reconcile the rate in amounts
Start with 100 of pretax profit multiplied by a hypothetical 25% reference rate, giving 25. A tax effect of +3 for nondeductible expenses and assumed credits of −4 yield 25 + 3 − 4 = 24. This is not an application of any country’s current tax rate or credit rules. Across periods, retain each adjustment’s sign, amount and denominator, together with the issuer’s explanation of its reference rate.
| Step | Amount | Share of pretax profit |
|---|---|---|
| Assumed reference rate | 25 | 25% |
| Tax effect of nondeductible expenses | +3 | +3 percentage points |
| Assumed tax credits | −4 | −4 percentage points |
| Tax expense in profit or loss | 24 | 24% |
3. Separate current, deferred and cash
Assume the tax expense of 24 consists of current expense of 28 and a deferred tax benefit of −4. The components add to 24, but even current expense of 28 need not equal cash paid in the period. The IAS 12 overview explains temporary differences between carrying amounts and tax bases. A deferred tax balance is neither automatically a payment due today nor freely available cash.
4. Reconcile the payable to payments
Assume no other movements and that all current expense enters the same payable account. Opening payable of 12 plus current expense of 28 less cash paid of 31 gives closing payable of 9. Cash paid of 31 differs from total tax expense of 24. Actual filings can include prepayments, refunds, prior-year settlements, acquisitions and currency movements. Retain explanations for differences. Cash paid of 31 divided by pretax profit of 100 is not a 31% income-statement effective tax rate.
| Measure | Computation | Amount |
|---|---|---|
| Tax expense in earnings | Current 28 + deferred (−4) | 24 |
| Cash paid | Assumed cash-flow payment | 31 |
| Closing current-tax payable | Opening 12 + current 28 − paid 31 | 9 |
5. Inspect losses and tax-asset limitations
Near-zero pretax profit or a loss can make a small adjustment produce a large rate movement. Record pretax amounts and tax expense or benefit before comparing percentages. For deferred tax assets, inspect recovery assumptions and unrecognized-loss disclosures without treating future profit as certain. Also distinguish tax recognized in other comprehensive income or equity from tax expense in profit or loss.
6. Retain six items from the filing
- Matching continuing-operations pretax earnings and tax expense.
- Current and deferred components, with expense/benefit signs.
- The reference rate, geographic mix and major adjustments.
- Cash payments, refunds, payables and prepayments.
- Deferred-tax recovery evidence and unrecognized items.
- Effects of settlements and law changes on the reported period.
Use the Income Taxes discussion and tax note in Microsoft’s 2025 report to connect an actual company’s rate explanation with its balances. Do not assume detailed US GAAP and IFRS disclosures are identical.
7. Connect the bridge to net margin
With no other profit items or noncontrolling interests, net income is 100 − 24 = 76. On revenue of 500, net margin is 15.2%, which can be checked in the margin calculator. Do not automatically use a historical effective rate as the marginal tax assumption in the WACC calculator. In the adjusted-earnings workbook, also check that pretax adjustments and their tax effects enter the reconciliation only once.